Nu Skin China probe could lead to sanctions and fines, but outlook is good

A probe by China's authorities into the direct seller Nu Skin’s business practices in the country could result in the possibility of fines or sanctions, the company has confirmed, but analysts believe the business will pull through.

In its annual filing with the US Securities and Exchange Commission, posted yesterday, the company stated that the actions of the China authorities had led it to temporarily suspend business promotional meetings and applications from new sales representatives, as well as extending its product refund and return policies.

“It is currently unclear what impact the adverse publicity and our voluntary actions will have on our business in this market in the longer term or whether these voluntary actions will be effective in addressing concerns of regulators in Mainland China. Regardless, it is likely that we will be fined and could potentially face some other form of sanctions from these regulators,” the document stated.

Sanctions, fines, and restrictions on licenses?

The company also stated that this could lead to further restrictions on future hiring in the country as well as the suspension of its ability to sell certain products, and in the worst case scenario, the suspension of existing licenses to sell its products in mainland China.

In a note related to the announcement, analyst John Faucher of JPMorgan stated that the company was in a good position to pay any fines or sanctions to the China authorities, and although he expressed concerns over the company’s future stability, ultimately he believes the company will be able to pull through.

“We think the stock will continue to be volatile in the near term until a resolution is reached, but we expect NUS to emerge relatively unscathed," the note stated.

China is Nu Skin's largest market, and is driving revenue growth

In 2013 mainland China became the company’s largest market, with a 32% share of its total revenues, which topped $3.1bn last year, a fact that is making investors nervous, given the potential impact this could have on the bottom line.

Compared to the previous year, sales increased by approximately one third in 2013, mainly driven by the gains seen in the China market, so if the threat to the Nu Skin business in China becomes a reality, it could jeopardise future growth.

Since the beginning of January, when the China's authorities' investigation was announced, share prices in Nu Skin have fallen from around $135 a share , to a current rate that has remained fairly steady at around $75 a share over the past few weeks.

Indeed, since the company’s announcement in its annual filing yesterday, share prices fell by almost 6% to close at $72.22 a share, reflecting investor concerns.

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A probe by China's authorities into the direct seller Nu Skin’s business practices in the country could result in the possibility of fines or sanctions, the company has confirmed, but analysts believe the business will pull through.